New Delhi: The Prime Minister's advisory panel on Monday said the economy is likely to grow by nine per cent in 2011-12 and inflation is seen moderating to five per cent during the fiscal. But for this, withdrawal of stimulus in the upcoming Budget would be needed, suggested the panel.

The government had offered tax incentives as stimulus to the industry two years ago to combat the impact of global financial crisis that pulled down the economic growth to 6.8 per cent in 2008-09 from over nine per cent recorded in the previous three years.

"We have to get back to the fiscal consolidation... this means withdrawal of some of the stimulus," Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan said while releasing the 'Review of the Economy 2010-11'.

The roll-back of stimulus has been already started by Finance Minister Pranab Mukherjee in the last Budget and it is widely expected that in the forthcoming Budget too some of the tax incentives would be withdrawn.

Mukherjee is scheduled to unveil the Budget for 2011-12 in the Lok Sabha on February 28.

Pointing out that the withdrawal should be in stages, Rangarajan said, "I believe it is time to move towards the process of fiscal consolidation. We clearly need to move in that direction."

Following the stimulus the fiscal deficit shot up to 6.3 per cent in 2009-10.

While the PMEAC's GDP projection at 8.6 per cent for the current fiscal is in line with the government's expectation, the advisory panel expects the economy to grow by about 9 per cent in 2011-12.

Inflation may go down

Observing that inflation is "uncomfortably high", the panel expects it to come down to 7 per cent by March-end and five per cent by June.

It also asked the government and the RBI to take steps to tame the rate of price rise.

"Inflation currently stands at uncomfortably high level. Monetary and fiscal policies have to be appropriately tight to protect the economy from inflation," C Rangarajan said

"There is a need to maintain tight monetary policy," he added.

Bid to stop flight of income

The PMEAC also asked the government to step up efforts to prevent flight of income to tax havens, besides improving tax administration to augment its revenue.

"... increase in revenue productivity will have to come from continued attempts to reform tax administration, review the double taxation agreements and other measures to prevent the flight of incomes to tax havens," it added.

According to the PMEAC, the agriculture sector is likely to grow at 5.4 per cent, industry 8.1 per cent and services sector 9.6 per cent in the current fiscal.

With economic growth projection for the financial year being revised upwards, the PMEAC expects the fiscal deficit to decline to 5.2 per cent of the GDP against 5.5 per cent estimated earlier.

As per the target set by the Finance Commission, the government will be required to bring down fiscal deficit to 3 per cent of the GDP by 2014-15.

"With the current year's fiscal adjustment may not be a problem, the government faces formidable challenge of conforming to the Finance Commission's targets in the medium," the PMEAC review added.

The fiscal deficit in 2009-10 soared to 6.3 per cent, mainly on account of the stimulus provided to the industry to combat the impact of the global financial meltdown.

Common rate for GST

On the proposed Goods and Services Tax (GST) regime on which the Centre and States are yet to reach a consensus, the PMEAC hoped the two sides would agree on its implementation from April 2012.

It also suggested a common rate for both goods and services tax, besides a separate tax on cigarettes.

The Centre plans to introduce the Constitutional Amendment Bill on GST in the forthcoming Budget Session.

The advisory panel is also bullish on the country's exports. It expects the shipments to be around USD 230 billion this fiscal. The Commerce and Industry Ministry had set an export target of USD 200 billion for 2010-11.

In the 2009-10 financial years the country's merchandise exports had come under pressure because of the slowdown in the Western markets and dropped to USD 175 billion from USD 189 billion in 2008-09.

As per the PMEAC, the merchandise trade deficit is projected to be USD 132 billion, or 7.7 per cent of GDP in 2010-11.

 

Agencies